How Much Does ERP Cost? [A Guide for SMEs]
Asking how much an ERP system will cost is a bit like asking how much it will cost you to buy a new vehicle. Do you want a car, truck or SUV? Domestic or foreign brand? A basic model or one with all the bells and whistles? The price range is wide based on your needs and wants. And the same is true for ERP systems.
Software Path’s 2019 ERP report indicated that the average ERP budget is $7,200 per user. But this varies based on the size of your business and number of users. The complexity of your business, the features you want and how much customization you need to make the solution ‘fit’ your needs also factor in. Here's a complete breakdown of the items that can impact the cost of your ERP system.
1. Software Licensing Model
License fees will vary based on the number of users and which licensing model you choose.
Typically seen with on-premise ERP software, you purchase perpetual licenses and own them. Even with your annual maintenance fees to access upgrades to new software versions, perpetual licenses offer a well-defined cost of ownership. Depending on the size of your organization, perpetual licenses can have a lower total cost of ownership over time, although the upfront costs can be a drawback for some companies.
You’ll see the SaaS (Subscription as a Service) model with cloud-based ERP systems. You pay a monthly fee for each user and have flexibility to add or remove users as required, subject to contract terms. While the upfront costs are lower without the one-time license fee, the ongoing subscription costs can become high over time, particularly if you have many users.
2. Implementation Costs
There are typically two approaches to implementation pricing – fixed price and time and materials. The option you choose can impact your budget. But like most things, the cheaper option isn’t necessarily better. Here are a few things to consider about each approach – weigh the options carefully to determine which makes the most sense for your business.
Fixed Price ERP Implementation
With a fixed price approach, the implementation is ‘templated’. Your partner has a prescribed approach that dictates the standard features and functionality to implement based on typical industry requirements. This repeatable method is designed to keep the costs down and can even speed up the implementation. But you also run the risk of having fewer of the features and functionality that you expected. Every change or addition beyond the fixed price scope increases cost, which can end up costing you more in the long run.
Time and Materials ERP Implementation
In a time and materials model, the price reflects what’s required to implement the solution based on your requirements. It’s a more tailored approach that ensures your ERP system meets your needs, rather than the general requirements of companies like yours. Here are a few key factors that can influence your implementation cost:
The features you need to configure – keep in mind that you can implement lower priority features in future phases to spread out the spend
The risk of scope creep, particularly if there is pent-up demand for new or improved functionality within your user base
The complexity of your business processes
Add-on solutions or integrations
Server and network hardware purchase or upgrade (for on-premise solutions)
User training – most ERP partners will include a certain amount of training in the project plan, but you can add more training time at an additional cost
While the costs are more variable with a time and materials approach, you often end up with a better fit solution. And keep in mind that it’s not necessarily one approach or the other. It’s possible to get the best of both worlds. Look for an ERP partner that’s willing to take a hybrid approach where they may offer specific project elements, such as the system design, for a fixed price fee. This gives you a clear picture of what the implementation cost will be before you start so scope creep becomes less of an issue. And don’t be afraid to ask what their track record is like – a good rule of thumb is to fall within 10% of budget.
3. Software Modification and Customization
For many companies, the standard system functionality suits their needs. But if you have unique processes or require custom integrations with other systems, this will increase the price of your implementation. The cost impact ranges depending on your needs – minor modifications can be relatively inexpensive, whereas custom modules can be more costly. Keep in mind that the cost is relative to the benefit you’ll see in the business.
One piece of advice – when considering any level of ERP customization, be sure to carefully evaluate the experience of the ERP partner. Some have more development expertise than others, which can greatly impact both the cost and return on your investment.
4. Ongoing ERP Costs
Implementing an ERP system isn’t a ‘set it and forget it’ event. Just like a new vehicle – your system will require care and maintenance to keep it running effectively.
Hosting fees – if you choose a private cloud ERP solution, you’ll pay subscription hosting fees for each user (even though your licenses are perpetual)
Infrastructure maintenance – if you choose an on-premise ERP system, you’ll take on the cost of maintaining and updating your servers and hardware
Maintenance fees – with a perpetual licensing model, you’ll pay an annual maintenance fee for each license that gives you access to ERP vendor support, bug fixes and upgrades
Software upgrades – in most cases, you’ll work with your ERP partner to upgrade your ERP system to the latest version, unless you have the in-house expertise to perform the upgrade yourself
The Bottom Line on ERP Pricing
There are many factors that can impact the cost of your ERP system. But as a rule of thumb, you can plan on a software and services project that’s between one and two percent of your annual revenue, including training. If your business is on the smaller side ($3,000,000 or less), you should expect the percentage to be closer to two percent of annual revenue. As your revenue scales up, you can expect an ERP project to get into the range of one percent, maybe less.
There’s always room for improvement. But ask yourself this question – can you improve overall performance by one or two percent? If the answer is yes, the cost of your implementation project is paid for. If not, then you likely already have good processes, a solid ERP system, or both.